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The number of tourists in Wroclaw has fallen by two-thirds due to the pandemic, but they have never been our main tenants. Although the city also has apartments in the center for daily rent, Wroclaw has a specific non-touristic nature.
20% of the population are students. A lot of immigrants from neighboring countries moved here recently. European companies often move their divisions (accounting, IT departments, research centers) to Poland, so there is work here and salaries continue to grow (+8% over the past year).
The main tenants of microaparments are students, expats, and young families who are saving up for a down payment on a mortgage.
The most difficult period for the market was in 2020. Due to the pandemic, universities switched to remote education, some students returned to their parents. In addition, many tourist apartments have replenished the number of offers from the long-term sector. This led to a drop in rental rates by 10-15%, and even by 20% in some areas.
We offered discounts for the tenants in advance, without waiting for them to move out. As a result, none of the nearly 50 studios we manage stood idle.
Now the situation is back to normal. Students are on full-time, another academic year began in October. The proportion of the vaccinated population in Poland is about 56%. Lockdowns are applied selectively. Rental rates are only about five percent lower than before the pandemic.
The sector has good long-term prospects. The market is in shortage of offers, and the number of potential tenants grows along with salaries in Poland.
2021 turned out to be a record for developers in terms of sales. Polish buyers buy apartments in all segments because of inflation, price growth, bigger wages… People are trying to save money, and real estate stands out among other alternatives. Here deposits are not profitable at all, the rates are close to zero, banks charge the commission for maintaining an account.
In 2021 developers in almost all cities sold more apartments than they put on the market.
| City name | Available apartments on the market, January - November 2021 | Number of apartments sold by developers, January - November 2021 | Average price per sq. m, November 2021, Polish złoty | Price change compared to January 2021 |
|---|---|---|---|---|
| Warsaw | 12 548 | 16 076 | 12 069 | +13% |
| Krakow | 5 907 | 7 882 | 11 061 | +9% |
| Gdansk | 4 685 | 5 260 | 10 818 | +20% |
| Poznan | 3 893 | 4 490 | 8 811 | +14% |
| Wroclaw | 5 515 | 8 491 | 10 495 | +20% |
| Lodz | 4 062 | 4 051 | 8 294 | +24% |
| Katowice | 937 | 1 338 | 8 213 | +11% |
| Source: RynekPierwotny.pl | ||||
We have been specializing in microformats of real estate for years now. The profitability in this segment is more interesting than in standard options.
The area of the studios is about 15 meters. Objects of 18 sq.m are already considered large, they are usually rented by couples. The smallest studio that we have in management has an area of 10.2 sq.m taking into account the bathroom (in the video). It's been rented out all the time. When the tenant left a year ago, we had a queue of applicants.
There are many legal and technical nuances that investors should take into account. In short, you have three options.
The entrance threshold depends on the area and location. For example, a repaired furnished studio with an area of about 20 sq. m in a residential area of Wroclaw with good transport accessibility costs about €70,000.
Three years ago Poland adopted a law according to which housing should be at least 25 sq. m. You will not find microaparments in new buildings with residential status.
Such objects remained on the secondary market since the law has no retroactive effect. From a legal point of view, these are independent residential units.
The main problem for the investor is the lack of offers. If such options go on sale, they are hunted. The cost of each square meter is relatively high, but the total price due to the small area remains pleasant. And the rental yield is higher than that of standard apartments.
The entry threshold of €130,000 is the cost of buying an apartment with an area of about 35 sq.m in a residential area. For such a price you can divide it into two studios with approvals, repairs, and furniture.
Another way to get microapartments is to buy a spacious apartment and divide it into several studios. The object remains the same legally, but you will have two to five studios that are rented out independently of each other.
The main problem here is the selection of a real estate object. It is necessary to make sure that is technically possible to change structures. We check each potentially suitable option with an architect (the price for an expert report starts at €50).
Technically, you can rent out rooms without equipping separate bathrooms and kitchens. There is always a demand for co-livings. But it is a very different category of apartments: they cost less, tenants change move more often. During the pandemic, many residents of such rooms reoriented to avoid sharing a bathroom with strangers.
Due to technical limitations, the entire Soviet housing stock does not have enough ventilation ducts to organize several studios.
You can choose among older buildings with stove heating (late XIX - early XX century), and new buildings (after the 2000s) with gravity ventilation is provided. In pre-revolutionary buildings, the cost per square meter is lower, but repairs are more expensive and difficult.
It is necessary to calculate economic parameters. For example, good residential areas are better suited for such a business than the city center. Because the cost per square meter there is up to two times lower, but rent is not cheaper. It is not necessary to consider the outskirts without access to municipal transport. The apartment should be conveniently located in relation to universities, office centers, factories, and other important objects for tenants.
We mainly consider new buildings. They are more profitable. Firstly, there is no tax on the purchase of real estate (2%) when dealing with a developer. Secondly, new buildings are sold without repair.
Often we buy objects off-plan, but when the house has already been commissioned. Developers still have layouts that are inconvenient for living, but suitable for our purposes. It is more profitable for them to sell the leftovers, so we can agree on a discount.
The entry threshold is €50,000 + 23% VAT for one micro-apartment
Development projects with microapartments have appeared in Poland in recent years. You can buy out individual studios or entire floors. Another option is to purchase land and build it yourself.
There are also nuances here. From a legal point of view, small apartments are not housing stock. And a foreigner cannot buy commercial real estate in Poland without the permission of the Ministry of Internal Affairs. Legally, this ban can be circumvented by registering a company in Poland ("spółka" is an analog of LLC) with a foreigner as a sole founder. Such entities have the right to buy commercial real estate without restrictions.
Another important advantage of working through a company is a tax refund. The developer submits a tax return and pays 23% VAT when selling apartments. If the buyer becomes a company that is a VAT payer, it can return the tax. The amount is serious. That is why 90% of microapartment sales take place with the participation of legal entities (even Poles conclude transactions like that).
Creating and maintaining a company requires expenses. It is unprofitable to open a company for one apartment: expenses will eat up all profits. That the scheme is appropriate when buying five or more units.
Such transactions are perfect when the whole house is designed for microapartments. Developers choose good locations, there offer features like electronic access with cards, reception, well-groomed territory. Complex repairs with the approval of alterations are not required, and you can buy a package of furniture from the developer.
Some developers go even further and offer studio management services to buyers. Sometimes they even guarantee a yield of 6-7% per annum.
It is not prohibited to place wet zones over residential premises in Poland. An apartment on any floor can be divided into several studios. However, in order to add bathrooms, it is necessary to comply with strict ventilation standards. Not every apartment has such an opportunity, this moment must be calculated together with the architect at the stage of choosing a property.
We mainly buy objects built after the 2000s. We look at the diameter of the channels, think over the layout, determine how many additional bathrooms we want to place.
If there is not enough power, you can try to install an additional ventilation system. In this case, we need to know where to place it. To install a fan on the roof, you need to get a permit from the housing office, and it is not easy. This is a risk for investors. Another option is to place the system inside the apartment, usually in a common corridor, but it is necessary to calculate the noise nuisance. We once refused to buy a large apartment precisely, for this reason: a fan placed in the room would be too loud.
There are a lot of technical nuances. Therefore, I do not recommend to engage in redevelopment projects without the support of an experienced architect.
We divided one apartment into at most five studios. It takes five months to redevelop and repair them. If you divide it into two studios, you can do it in two-three months. When buying ready-made micro-apartments from a developer, a simple repair can really be done in a month and a half.
If we talk about prices, the cost of repairs with the approval of redevelopment in a modern house will be about 3 thousand zlotys per square meter (€650), and 3.5-4 thousand zlotys (€750-850) in the old fund. Repairs and furniture for microapartments from the developer cost about 2 thousand zlotys (€430) per meter.
We focus on long-term rentals. Firstly, because the Wroclaw market is better suited for it. This is not Krakow, there are fewer tourists here, but a lot of students and labor immigrants who need housing for a long time.
Secondly, it is easier to organize a long-term lease. Most private owners who lease apartments to tourists do not advertise all the volumes that pass through them. Sooner or later everything will come out. In my opinion, it is better to act within the legal framework.
But if you work officially, the apartment for short-term rent will be equated to commercial real estate, the ownership tax will increase significantly, with a certain volume of transactions, even an individual (the owner of the object) will have to pay VAT. There will be additional costs for advertising and personnel, the management of the facility will be more expensive, and rental receipts in this sector are unstable.
A long-term lease makes it much easier. The owner does not need to be in Poland. They enter into a contract with the management company for the administration of the real estate. The management company can rent out an object, organize repairs, evict someone forcibly, interact with housing and communal services or utilities by proxy. They need a power of attorney and the account number to which the rent will be received is indicated. That's all.
Management companies do not guarantee profitability from the delivery of the object. Their fee depends on the rental income. Therefore they are not interested in downtime, and the rental rate is higher.
Another option is an apartment in a new development project with its own management company. A completely passive business with guaranteed profitability. Usually, they offer 6-7% per annum for up to five years.
Investors always question what will they do with this apartment when the guaranteed lease period ends? We have not passed this way with any client yet. Similar projects have started to appear recently, and all the concluded contracts are now in force.
Theoretically, you have two options.
Number 1. In five years, the developer will assess the condition of the object and calculate how much you need to pay for interior renovation. According to the law, if the tenant has broken something, these costs are reimbursed from the security deposit. But if the furniture has simply aged, then it is changed at the expense of the owner. The owner pays for the repairs, and the contract is extended. It is advantageous for the developer to hold on to the client because they have already created a management company, incur personnel costs, which means they need turnover. It is economically advantageous for them to negotiate with an investor.
Number 2. If the developer refuses to rent the apartment, then nothing terrible will happen either. You can turn to independent companies that will be happy to take such a studio into management. Of course, they will also assess the technical condition of the facility and give recommendations on how to get the maximum rental rate.
Another important point is why I would not conclude a ten-year lease (or any other sufficiently long term). Due to the consequences of the pandemic, rent has fallen in price, and in a normal situation, it becomes more expensive by 3-5% per year. Why limit yourself if in five years the stakes will surely be higher.
Finally, about profitability. 7% per annum is not a net profit. This amount does not include taxes. Also, many developers do not take into account the costs of repair and purchase of furniture. In fact, the owners receive 4-5% per annum in hard cash.
Do not forget that the final profitability of any real estate project is formed from several sources. Firstly, the cost of the object increases dramatically after the repair. Secondly, real estate is getting more expensive every year. It is difficult to give guarantees, but we can count on a price increase of 5-10% per year judging by the results of past years and the analysis of Poland's economic prospects.
You need to own property for five full years to sell an object without an income tax. This applies only to individuals. There is no grace period for companies that own microapartments, they can apply the depreciation rate: even if the repair is not actually done, the accountant has the right to write off a certain amount to reduce the taxable profit.
Cover Image: Mircea – See my BEST collection from Pixabay website
